Our ultimate stock pickers 10 best buys with high conviction

While looking at the buying activity of our Ultimate Stockbrokers, we are concentrating on buying with high conviction and buying new money. We think of high-conviction purchases as apartments where managers have made meaningful additions to their portfolios, as defined by the size of the purchase relative to the size of the portfolio. We define a purchase of new money strictly as a case where a manager buys a stock that was not in the portfolio in the previous period. Purchase of new money can take place either with or without a conviction, depending on the size of the purchase, and a conviction purchase can be a purchase of new money if the stock is new in the portfolio.

We recognize that the decisions of our ultimate stockbrokers to purchase shares in any of the securities highlighted in this article could have been made as early as the beginning of February, so the prices paid by our managers may be significantly different from current trading levels. Therefore, we believe that it is always important for investors to assess the actual attractiveness of any of the securities mentioned here, based on a wide range of factors, including our valuation estimates along with our moat, management and uncertainty assessments.

Since 2020, headwinds created by the pandemic have hampered markets and put a wide range of industries on the sidelines as governments across the globe imposed lockdowns and imposed restrictions. And just as the market sought to recover slowly as pandemic restrictions were lifted and a return to normalcy began, the Russian invasion of Ukraine threw another wrench into the global economy, raising energy prices and creating inflationary pressures that have affected food and energy markets. The first quarter of 2022 has been defined by a tumultuous market, as divestments in technology have reflected a depression in the overall market and fears of a potential recession. The Fed has already raised interest rates by 0.75 percentage points since March, from near-zero levels that had been in place since the early days of the pandemic. But despite market headwinds, Ultimate Stock-Pickers are still seeking to find value in individual stocks in a period of volatility and uncertainty. These stocks are in a wide range of sectors, such as industries, communications services and consumer cyclical.

The purchasing activity on the top 10 list of high-conviction purchases was spread across a wide range of sectors, including industries, basic materials, communications services and consumer cycling. Nine out of 10 companies on the list of high-conviction purchases and six out of the 10 companies on our list of new money purchases received at least a narrow economic mound rating from Morningstar analysts, which is in line with trends we’ve seen over the last couple of years. The three names we find most interesting on buy and pinch lists with high conviction are Sherwin-Williams, who are ranked with big graves. (SHW)T-Mobile, classified without moat (TMUS)and excavator rated Home Depot (HD).

There was a moderate amount of crossover between our two top 10 lists during this period, with a few names on both lists. This quarter, both Amazon (AMZN) and Alphabet (GOOGL) received four purchases with high conviction from our manager list with Meta (FB) receives three. All three of these companies have broad economic moats and trade at large discounts relative to their estimates of fair value, indicating that money managers place emphasis on blue-chip stocks like these in a period of uncertainty. The rest of the list was populated by names from a wide variety of industries, including base materials and industries.


One name that stood out to us was the broad Sherwin-Williams, which attracted two purchases with great conviction during the first quarter of 2022. The name is currently trading at around $ 258, which is a significant premium over Morningstar- analyst Spencer Lieberman’s fair value estimate of $ 197. It’s the only name on our top 10 high-conviction shopping list that trades under 3 stars.

Sherwin-Williams is the largest supplier of architectural paint in the United States. The company has approximately 4,800 stores and sells premium paints at higher price levels than most competitors. It also sells paint-related products in large stores and supplies coatings to original equipment manufacturers.

Lieberman notes that in Sherwin’s largest segment, the Americas Group, it has maintained strong growth, even in developed markets, as it rolls out nearly 100 new stores each year across the Americas. Its strategic focus on building this segment has created a strong value proposition for contractors. Delivery in the workplace, ordering in the app and a capacity for orders in large quantities saves time for customers and allows for premium product prices. About 90% of sales in the Americas group are to professional painters, while the remaining 10% to do-it-yourself, do-it-yourself, consumers.

The consumer brand segment markets Sherwin’s paint brands through retail channels, such as Menards, and is the exclusive supplier of coating products to Lowe’s (LOW). It owns a number of well-known brands such as Valspar, Purdy, Minwax, Krylon, Thompsons Waterseal and Dutch Boy. Its performance coating business produces a varied product mix and accounts for much of the company’s global exposure. The segment sells everything from marine paint to aircraft and fire-resistant coatings, many of which are custom-made to suit customers’ needs.

Lieberman assigns the company a broad-based moat rating, believing that Sherwin-Williams will enjoy lasting competitive advantages that should support financial profits for at least the next 20 years. For Lieberman, the benefit of the moat comes primarily from intangible assets. He notes that the Americas and consumer brand segments (which account for more than 80% of the segment’s EBIT) benefit from strong brand equity, which has supported lasting pricing. While the performance coating segment benefits from restructuring costs, we give it a narrow moat as we do not believe its pricing capability is as durable as the company’s other segments. The segment does not represent a sufficiently large percentage of the consolidated portfolio to justify an expansion of the source of replacement costs to the company. That said, Sherwin’s broad-segment segments (America and Consumer Brands) account for most of its profits, leading to Lieberman’s broad moat assessment for the company.

T-Mobile USA

Two of our money managers made the convincing purchase of new money by T-Mobile USA, a company that is currently trading at a discount compared to Morningstar analyst Michael Hodel’s fair value estimate of $ 145.

Hodel notes that since Deutsche Telekom merged its T-Mobile USA unit with prepaid specialist MetroPCS in 2013, T-Mobile USA has provided nationwide service in larger markets but more spot coverage elsewhere. T-Mobile used aggressively on low frequency spectrum, suitable for wide coverage and has significantly expanded its geographical footprint. This expansion, combined with aggressive marketing and innovative offerings, provided rapid customer growth. With the Sprint acquisition, Hodel notes that the company’s scale now roughly matches its major competitors: T-Mobile now serves 70 million postpaid and 21 million prepaid phone customers, accounting for nearly 30% of the US wireless retail market. In addition, the company provides wholesale service to dealers.

Hodel expects the T-Mobile network to match well with its long-term rivals, thanks to the huge amount of spectrum that the company now controls. Its mid-range spectrum, which is likely to provide the majority of wireless networking capacity well into the future, is massive and largely unused, a position that allowed it to avoid matching Verizon (VZ) and AT & Ts (T) spooky spending on the C-band spectrum auction in 2021. Efficient and effective implementation of this resource, something Sprint failed to do alone, is now the company’s primary goal.

But Hodel claims that T-Mobile’s network is not perfect. The company does not own significant landline assets, which is becoming increasingly important as wireless networks become closer. He expects the company to have access to third-party networks on reasonable terms, but this remains a risk. T-Mobile also leases many of its spectrum licenses and will have to renew leases or purchase licenses directly in the coming years.

In the race to implement 5G, each US carrier has taken a different course, emphasizing different assets, spectrum bands, and technical elements. Hodel believes Verizon is trying to set the bar for the industry through aggressive investments in fiber optics, with AT&T racing following suit. T-Mobile has primarily implemented 5G as an extension of its existing network, adding capacity, but without the same extreme download speeds that Verizon has seen in the limited areas that its strongest 5G network can reach. T-Mobile may be forced to make difficult choices between increased investment in frequency and network equipment or risk falling behind customer expectations.

Home depot

Our Ultimate Stock-Pickers also made two convincing purchases at wide-moat Home Depot, the world’s largest retailer of home improvement. Home Depot is currently trading at a small premium over Morningstar analyst Jaime Katz’s fair value estimate of $ 264.

Home Depot is the world’s largest home improvement retailer, and Katz believes the company is on track to deliver $ 156 billion in revenue by 2022. In her view, it continues to benefit from a healthy level of home revenue along with perpetual improvements in its merchandising and distribution network. She awards it a broad economic rating due to its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational expertise and concise merchandising remain key principles underlying our modest margin expansion forecast. Its flexible distribution network will help lift the company’s intangible brand asset with faster delivery times, enhancing the do-it-yourself experience and market delivery centers that cater to the professional business. Katz believes that the success of ongoing initiatives should allow for a flat operating margin in 2022 despite significant inflationary pressures.

According to Katz, Home Depot should continue to capture sales growth, bolstered by an aging housing stock, lack of home furnishings and rising house prices, even when robust demand for COVID-19 falls. Other internal catalysts for top-line growth could come from the company’s efficient supply chain, improved merchandising technology and the penetration of adjacent customer product segments (supported by the acquisition of HD Supply). Expansion of newer (such as textiles from the acquisition of the Company Store) as well as existing (such as appliances) categories could also drive demand.

In her view, perpetual improvements in the omnichannel experience should support the company’s competitive position, even as sales and sales of existing homes become more volatile. The commitment to better merchandising and an efficient supply chain has led the company to achieve operating margins and adjusted return on invested capital, including goodwill, of 15.2% and 35% respectively in 2021 (both quantitative peaks). In addition, Home Depot’s focus on cross-selling products in both its do-it-yourself and its maintenance, repair and operating channels should support stable pricing and volatility in the sales base, helping to achieve a further increase in operating margin where measurement remains above 15% consistently over the next decade.

Disclosure: Eden Alemayehu, Justin Pan and Eric Compton have no holdings in any of the securities mentioned above. It should also be noted that Morningstar’s Institutional Equity Research Service offers analysis and analyst access to institutional asset managers. Through this service, Morningstar may have a business relationship with mutual funds described in this report. Our business relationships do not in any way affect the funds or shares discussed here.

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